Auto-enrolment - reducing the cost

FINANCE DIRECTORS across the country are counting down to auto-enrolment, widely seen as the most important reform of the UK pensions market since the introduction of state pensions in 1909.

The precise time when companies will have to meet their auto-enrolment obligations – the ‘staging date’ – varies depending on the number of employees as of 1 April 2012.

If a company has over 250 employees, then the dates in the table below will apply. For smaller companies and those that came into existence after April 2012, more time may be available.

The Pensions Regulator’s website has useful guidance that can help companies figure out the exact staging dates that apply to them. Smaller companies that have fewer employees and which operate multiple PAYE schemes might find this especially useful.

Source: www.thepensionsregulator.co.uk. Details correct as at 11.05.12

The key underlying objective of the government’s auto-enrolment plan is to get more people invested in pensions. Unsurprisingly for the large majority of companies, enrolling more employees will lead to higher pensions contributions. While these extra costs are unavoidable, there is nothing to stop finance directors from looking at other areas where offsetting savings can be found.

The task of enrolling higher volumes of employees onto pension schemes is obviously a significant administrative challenge for company HR, payroll and technology departments. Moreover this will also tend to push up costs. The good news here is that help may be at hand from providers many of whom have devised services that can achieve the migration task in a potentially less stressful and less costly way than in-house.

In addition to managing the transition to auto-enrolment efficiently, finance directors can also take a look at the structure of their existing plans to see if they are cost effective. Two major industry distinctions here are 1) unbundled plans v bundled plans and 2) trust-based plans v contract based plans.

An unbundled plan is one where the trustees engage with each of the main service providers – investment managers, member communications and administrators – separately.

Traditionally, it was felt that this unbundled approach gave trustees greater flexibility in choosing fund managers. However, the advent of open architecture in the bundled provider space has enabled the same level of flexibility but also with the benefits of automation and greater efficiency.

This means that a bundled provider who carries out all the key functions (investment, communications and administration) collectively can pass on significant efficiency savings to clients by way of reduced admin fees. In addition, it is also possible to pass on some or all of the administration costs to the members of the plan.

The main alternative to trust-based pensions are contract-based pensions, where, as the name suggests, a contractual relationship exists directly between the employee and pension provider.

In contract-based pensions, there is no requirement to operate a trustee board although (non-obligatory) best practice among employers is to operate a governance committee. These plans typically offer members access to a fully automated web front end as well as telephone and email support.

Nowadays contract-based plans also tend to offer a very wide range of investment choices that cater for all kinds of requirements and preferences.

From the purely financial perspective, the obvious advantage of contract-based pensions is lower costs for employers. This is because there are none of the costs associated with the setting up of and the running of trustee boards. For finance directors looking to mitigate, offset or neutralise the inevitable additional costs of auto-enrolment, contract-based pensions might therefore be a preferable solution.

The assumption made by some that contract-based pensions are somehow ‘governance-lite’ is not accurate. On the contrary, it is probably easier to make a case that the duty of client care is even greater for providers as they are regulated by the FSA.

Auto-enrolment is a very important reform that should help to achieve the government’s aim of getting more employees engaged in pensions and investing for their future.

This is to be welcomed, but it is also a change that is likely to impose significant additional costs on employers. For companies, the impending changes provide an ideal opportunity to thoroughly review their overall pension arrangements. Two potential ways that finance directors can look to mitigate the higher costs of auto-enrolment are to consider switching from unbundled pension plans to bundled pension plans and to move from trust-based plans to contract-based plans.

In terms of timing, plan sponsors looking to implement changes to their pensions schemes should aim to finalise their plans nine months prior to the staging date as employers will need at least a six month lead-in time to make the necessary structural changes to existing pensions plans.

Early engagement with providers and advisers will give you the greatest opportunity to mitigate the costs of auto-enrolment for your organisation. With the earliest staging date being just a few months away in October, the time to act for many will be now!

Daniel Smith, director, business development, Fidelity’s DC and Workplace Savings

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